UK food, clothes and electricals see biggest price falls in nearly nine years

http://www.theguardian.com/business/2015/apr/08/uk-food-clothes-and-electricals-record-price-falls

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British shoppers have enjoyed the biggest falls in the price of food, clothing and electrical goods for almost nine years, as supermarkets fight for customers and the global slump in oil prices continues to feed through to the high street.

Prices in UK shops were 2.1% lower in March compared with a year ago, the biggest annual decline since the British Retail Consortium-Nielsen price index began in 2006.

The BRC predicted that with consumer confidence high and incomes growing in real terms, shoppers would take advantage by stepping up the quantities they buy and also spend on affordable luxuries.

Another closely watched survey showed that growth in the UK’s dominant services sector moved to a seven-month high.

According to the BRC-Nielsen index, food prices fell by 0.9% compared with a year ago, a record decline for the index and reflecting a fierce supermarket price war and sharp fall in oil prices. The biggest price drop was for fresh items such as milk, cheese, eggs, meat and vegetables, although some cupboard staples, including cereal and jam, also became cheaper.

Non-food items fell at an even faster rate, decreasing on average by 2.8% year-on-year as retailers battled to offer discounts to cash-conscious shoppers. Clothing and footwear was 7.8% cheaper than a year ago, while electrical goods were 5.7% cheaper.

Cheaper energy prices have helped bring inflation to zero, according to the latest government figures, lifting incomes in real terms and boosting the Conservative-led government in the runup to the general election on 7 May.

February’s consumer price index measure of inflation had dropped from 0.3% in January, raising the prospect of a deflationary period in the coming months.

A sharp fall in oil prices – down from averages exceeding $110 a barrel before last summer to around $58.57 on Tuesday – has enabled retailers to offer consumers cheaper goods and petrol.

Helen Dickinson, the BRC director general, said: “With strong consumer confidence and relatively benign macro-economic conditions, we can expect the nation to respond with their feet or with a mouse click in the coming weeks.”

Analysts questioned whether Britain was continuing to rely on consumer spending to boost growth while business investment, worker productivity and export growth remain lacklustre.

Related: UK inflation hits zero for the first time on record

The Markit/CIPS purchasing managers’ survey for the service industries, which account for about 77% of the UK economy, stood at 58.9 last month, up from 56.7 in February and comfortably beating City expectations of 57. The seven-month high adds to the likelihood the chancellor, George Osborne, will go to the polls with the UK as one of the world’s fastest-growing major economies. Readings above 50 signal growth of activity compared with the previous month.

Chris Williamson, the chief economist at Markit, said surveys covering the services, construction and manufacturing sectors indicate the economy grew by 0.7% in the first quarter of 2015, reversing a slowdown seen late last year.

“The combination of fuller employment and falling prices should support economic growth by providing an important catalyst to higher consumer spending, on which the upturn appears to have become increasingly dependent in recent months,” he said.

The survey data showed employment growth remaining close to record highs and that inflation showed few signs of picking up from its all-time low, Williamson added. Though companies complained that skills shortages were becoming a bigger problem and could soon put a brake on growth.

The combination of accelerating business growth and falling prices presents a puzzle to the Bank of England’s monetary policy committee, which is scheduled to announce its final interest-rate decision before the election on Thursday.

For the hawks on the committee, “services activity and employment continues to rise at a strong rate, while there is evidence of rising wage pressures in the sector,” said Martin Beck, a senior economic adviser to the EY ITEM Club.

“But for those more inclined to wait and see before hiking rates, March’s services survey also offered support, showing growth in input costs remaining historically muted and output prices rising only fractionally.”